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Possibly the biggest anti-piracy bust of all time took place on January 20th, when a global sting operation led by the FBI and the Department of Justice brought down the file-sharing giant Megaupload – and arrested its founder, the 38-year-old German hacker and playboy Kim Dotcom. "I defy anyone to go back and find something bigger than this," says a source at a major record label. "This makes LimeWire look like kindergarten."

Born Kim Schmitz, Dotcom was arrested in Auckland, New Zealand, where he lived in what is reportedly the country's most expensive private home. Six other Megaupload executives were also arrested. The crew is charged with "criminal copyright infringement and money-laundering on a massive scale" – an estimated $500 million of pirated content, with a combined $175 million in income. (Megaupload claimed to have 50 million daily visits and four percent of the Internet's total traffic.) Authorities seized Dotcom's mansion and 18 luxury cars, including a 2008 Rolls-Royce Phantom Drophead Coupé with a GOD license plate.

Dotcom, who was denied bail, is in an Auckland prison facing as much as 20 years if he's found guilty. Megaupload's U.S. attorney, Ira Rothken, insists that the company was a content-storage site, similar to Dropbox, and Dotcom had no knowledge of any of its users' piracy activities. "This is basically a showing of copyright extremism by the government, in taking down an entire site in an overbroad manner, without giving Megaupload an opportunity to be heard in court," says the attorney.

The Megaupload indictment came at a time when piracy was very much in the news. A day earlier, a pair of anti-piracy bills – the House's Stop Online Piracy Act (SOPA) and the Senate's Protect Intellectual Property Act (PIPA) – were killed after a massive campaign backed by Web giants including Google, Facebook and Wikipedia. In the wake of the campaign, which involved millions of Americans writing to their representatives and symbolic blackouts of major sites including Wikipedia, Sen. Patrick Leahy, D-Vermont, and Rep. Lamar Smith, R-Texas, abruptly withdrew their bills.

The bills were proposed after aggressive lobbying efforts by the Recording Industry Association of America, the Motion Picture Association of America, and media giants including News Corp. and Time Warner. The laws would have given the U.S. government more tools to fight pirate sites based overseas – by, say, forcing Internet service providers to discontinue access to an offending website. But opponents claim the laws were written in such a way that entire legitimate websites could be forced offline due to one item of infringing material, among other concerns.

"These bills were just bad law," says Wikipedia founder Jimmy Wales, whose pages were among the 7,000 websites that went dark during the January 18th protest. "Whatever one's views on protecting intellectual property – and I'm a strong proponent – this legislation would not have achieved the goals it set for itself. And it would have disrupted more important things, like freedom of speech on the Internet." The bills are likely to reappear in a different form, sources say, after the November elections.

In some ways, the Megaupload indictment seems to vindicate the tech companies' campaign, part of which asserted that anti-piracy laws already on the books needed stronger enforcement. Megaupload sold ads and charged premium subscribers for unlimited downloading. Unlike, say, YouTube, the company frequently ignored requests to pull down copyrighted material.

Strangely, Megaupload even was able to gain the support of some music stars. Swizz Beatz, the veteran hip-hop producer who is married to Alicia Keys, consulted for the company and was considering an offer to become CEO. Sources say the producer persuaded friends, including Kanye West, Diddy and Chris Brown, to appear in the "Mega Song" promotional video in 2011 – which begins with Will.i.am rapping, "When I gotta send files across the globe, I use Megaupload." "[Swizz] is not CEO, although they were in serious talks for him to become CEO," says a source familiar with the producer's situation. "They were quite a way along, but they hadn't finalized it."

The U.S. investigation into Megaupload, which took two years in partnership with law-enforcement agencies in New Zealand, Hong Kong, Germany and elsewhere, allegedly uncovered incriminating e-mails; a PayPal account that received more than $110 million from subscribers; and international bank-account transfers totaling millions of dollars. "The sheer income of Megaupload proves that they're profiting immensely from the works of American creators," says Steve Bogard, president of the National Songwriters Association. "It's unconscionable."